Wars profoundly impact the economy, society, and environment, bringing widespread destruction to assets, infrastructure, and human lives. This destabilizes both social and economic foundations due to the disruption of daily routines and the diversion of economic activities from their usual course. During periods of conflict, countries are compelled to shift into a ‘war economy’, where they must strike a delicate balance between sustaining development goals and addressing military demands.
In addition, countries, in times of war, typically channel their economic resources—labor, capital, raw materials, and energy—toward defense and military expenditures, leading to adverse social consequences due to the ‘resource scarcity’ dilemma. This scarcity arises from the limited availability of resources to meet growing demands, forcing countries to sideline development and social objectives such as education, healthcare, and infrastructure to fund the production of weapons, equipment, and the needs of their armed forces.
Throughout history, numerous countries have adopted war economy strategies during conflicts, including World Wars I and II, the Vietnam War, the Korean War, and the Russian-Ukrainian War. This paper, however, will specifically highlight the October 1973 War as a prime example of the war economy in action. During this period, Egypt implemented austerity measures such as reducing consumer spending, delaying long-term investment projects, and mobilizing public support through debt instruments and tax hikes. As a result, the economic tools employed by Egypt were key in enabling the nation to endure the setbacks of the 1967 defeat and ultimately achieve victory in October 1973.
I. Theoretical Underpinnings of the ‘War Economy’ Concept
The literature suggests that the concept of a ‘war economy’ originated during the American Civil War (1861-1865), when the government had to borrow and print additional money to meet war-related financial demands and fund defense expenditures. However, the term gained formal recognition in political discourse during World War II, when US President Franklin Roosevelt explicitly mentioned the inevitability of the United States becoming a lasting military power, rooted in the principles of a war economy. Since then, economists have sought to establish a precise definition for the concept of war economy, until the scholar Philippe Le Billon made a significant contribution by offering a definition that remains widely accepted in academic circles. He described a war economy as “the establishment of a system for producing, mobilizing, and allocating resources to support the war effort,” or “the process of mobilizing and restricting all available local material and human resources, redistributing their use so that the majority are directed toward serving the state’s war effort,” or “organizing the state’s productive and distributive capacities during wars and conflicts, while making essential adjustments to the production structure to meet the demands of defense production.”
This means that war economy involves reorganizing the state’s productive and distributive capacities during wartime, with a shift in resource allocation priorities aimed at securing military victory while also addressing the needs of local consumers. In other words, it consists of a series of measures adopted by the state during wars or periods of internal crisis, which include implementing a production system that optimizes the use of economic resources to ensure their sustainability. Simultaneously, it requires structural adjustments to the local economy, redirecting part of the resources to fund war-related expenses and armament production, while curtailing public spending on social services and focusing it solely on meeting the essential needs of citizens.
The definition outlined above represents the traditional definition of war economy, which focuses on balancing the need to achieve military objectives with their economic and social consequences. However, with the technological advancements witnessed globally, this definition has evolved. It now extends beyond the simple reallocation of natural and human resources for defense production and includes the integration of technology, electronics, artificial intelligence, and increased research and development in fields such as communications, information technology, and space to further military goals. Thus, the state’s approach to managing the war economy could involve leveraging these tools:
1. Prioritizing Defense over Social Spending: In times of war, governments often prioritize defense spending—directed towards weapons and ammunition production—over allocating resources to health, education, housing, and infrastructure. This is driven by the growing threat that war poses to available financial resources, caused by the destruction of infrastructure, the halt of production in certain industries, and disruptions in export or income-generating activities. As a result, governments are forced to optimize resource consumption and redirect funds to activities that ensure military success. A clear example of this can be seen in Russia’s actions during the Russian-Ukrainian war, where defense spending was increased to RUB 13.2 trillion ($142 billion) in the 2025 budget, up from RUB 10.4 trillion rubles in 2024. This represents approximately 6.2% of Russia’s GDP and 40% of total budget expenditures, surpassing the financial allocations for health and education.
2. Tight Fiscal Policy: During wartime, countries often implement a contractionary fiscal policy by increasing taxes on income and corporate profits to finance military expenditures and meet national security demands, ensuring that sufficient funds flow into the defense system. Additionally, governments may turn to borrowing, issuing debt instruments like bonds or treasury bills at relatively low interest rates, with the intention of repaying these debts after the war. The United States applied this strategy in 1950 and 1951, when Congress raised taxes by approximately 4% of GDP to fund the Korean War, even though tax rates had already been high during World War II, a period in which federal revenues nearly tripled as a share of GDP. This surge in revenue was due to the number of citizens subject to income tax, which increased tenfold—from 3% of the population in 1939 to 30% in 1943. In the case of Russia’s war in Ukraine, the country applied the same strategy in 2023, raising income taxes by 14% and corporate profit taxes by 25% to boost financial resources.
3. Government Control over Economic Activities: In times of war, governments typically implement an economic mobilization plan that tightens control over economic activities, manages available resources, and compels companies and factories to adapt their production structures to align with the war effort. For example, the agricultural sector may be refocused to ensure a steady food supply for both citizens and the armed forces, while eliminating non-essential luxury food items, promoting self-sufficiency, and preserving exportable agricultural goods. Additionally, civilian industries may be repurposed to manufacture military goods needed for defense. During World War I, the United States expanded its governmental authority, directing farmers to increase grain and strategic crop production and establishing the War Industries Board (WIB) to boost defense production. The WIB also oversaw resource allocation for the war effort, including copper, rubber, and oil, and awarded defense contracts to civilian companies to bolster military production. Similarly, during World War II, Germany expanded its industrial base by constructing new factories to meet military demands, effectively linking defense with economic resources as a key pillar of national security during the interwar period.
4. Inflationary Financing: To meet the rising costs of defense during wartime, governments often turn to printing money, known as inflationary financing, as a less burdensome alternative to increasing taxes. This approach involves issuing more paper currency without adequate backing to finance increased defense spending, often disregarding the consequences for the value of the national currency and inflation rates. Typically, inflation rises during wartime due to the scarcity of goods and increased demand for military resources. For example, during the US Civil War, the government was compelled to print money, resulting in a tenfold increase in the money supply between 1861 and 1864.
Compulsory Conscription: In times of war, countries often rely on compulsory conscription to mobilize civilian labor for military service, which can have a disruptive effect on the labor market and overall workforce stability. This was particularly evident during the Russian-Ukrainian war, when Ukraine reduced the conscription age for men from 27 to 25 years and removed certain exemptions, thus adding approximately 50,000 new soldiers to its military ranks. On the other hand, Russian President Vladimir Putin signed a decree in March 2024 to conscript 150,000 citizens for legal military service, following an earlier mobilization of 130,000 in September 2023. Additionally, the Russian Parliament passed legislation raising the maximum age for male conscription to 30 years, up from 27, with the new law taking effect on January 1, 2024.
II. War Economy in Egypt: The Case of the October 1973 War
Following Egypt’s defeat in 1967, the economy faced severe setbacks, with losses estimated at EGP 11 billion (approximately $25 billion based on the exchange rate of $2.3 to the pound at that time), as was reported by former Prime Minister Aziz Sedky. Additionally, Egypt lost about 80% of its military equipment, significantly increasing the need for replacement purchases. The Suez Canal also faced a significant loss in revenue, estimated at EGP 95.3 million, while the country lost oil wells in Sinai. Israel’s bombing of Suez Canal infrastructure caused further destruction, amounting to nearly EGP 1 billion ($2.3 billion). The tourism sector was hit hard, with annual losses estimated at EGP 37 billion, and the destruction of 17 major industrial facilities, resulting in a loss of EGP 169.3 million ($389.4 million). In response to these massive losses, Egypt had to shift to a war economy from 1967 to 1973, implementing the following measures:
1. Increasing Military Spending: In 1973, the Egyptian government implemented a ‘war budget,’ which was introduced by Prime Minister Aziz Sedky in February of that year. The aim was to secure adequate funding for the armed forces’ needs, including medical supplies and food in case of war, while postponing long-term development projects. The government also initiated cuts across various sectors, reducing expenditures in government departments and the public sector. This included slashing travel and transportation budgets, as well as cutting back on holiday and seasonal allowances. In March 1973, further austerity measures were introduced in preparation for war, such as a 10% reduction in allocations for water, lighting, and transportation, including railway services. Additionally, the government reduced holiday and seasonal funds by 75%, reviewed maintenance budgets for the Ministries of Irrigation, Housing, Petroleum, and the Postal Authority, and reassessed investment projects in the 1973 budget. Projects not directly related to the war objectives were postponed. Figure 1 illustrates the evolution of military spending in Egypt from 1966 to 1975:
Figure 1: Evolution of Egypt’s military spending, 1966-1975
Source: Stockholm International Peace Research Institute (SIPRI), Military Expenditure Database
The above figure illustrates that Egypt’s economic policy during the interwar period (1967-1973) was heavily focused on prioritizing defense investments and military spending over all other areas of expenditure. Between 1966 and 1973, Egypt’s military expenditure grew from $481.8 million to $1.243 billion, reflecting an increase of approximately 158.4%. Additionally, the share of military spending in Egypt’s GDP surged from 6.68% to 13.51%.
2. Implementation of Contractionary Policies: Following the 1967 defeat and up until the 1973 victory, the state adopted contractionary economic policies through three primary mechanisms. The first involved increasing the prices of luxury goods and imposing indirect taxes. The second focused on reducing incomes by raising or creating new direct taxes, alongside limiting government sector promotions. The third involved reducing total domestic investments while conserving available savings resources. As a result, tax revenues from indirect taxes and customs tariffs grew from EGP 442.5 million in 1970 to EGP 574.7 million in 1973, with their share of total tax revenues increasing from 63.4% to 69.1%. In contrast, direct taxes amounted to EGP 257.5 million in 1973, representing 30.9% of total tax revenues. Moreover, Egyptian citizens maintained their deposits in commercial banks during this period, which helped stabilize the banking sector. As a result, total deposits in banks increased to EGP 400 million, including EGP 27 million in family investment certificates.
3. Harnessing Popular Support through Investment Instruments: Between 1967 and 1973, the Egyptian banking sector introduced various investment savings instruments to mobilize public support. The value of treasury bonds increased from EGP 164 million in the fiscal year 1959-1960 to nearly EGP 375 million by 1969-1970, reaching EGP 459 million in 1972. Additionally, Jihad Bonds were issued with the slogan ‘Participate in the Epic of National Struggle,’ offering a 4.5% annual interest rate, tax-exempt for ten years. The bonds had denominations of 50 piasters, EGP 1, EGP 5, EGP 10, and EGP 100. The proceeds, totaling around EGP 7 million, were allocated to support the armed forces, national security, and the growing defense expenditures.
4. Augmenting the Money Supply: In addition to implementing tax increases and issuing bonds in financial markets, the Egyptian state resorted to printing more money to partially finance its military expenses. This strategy contributed to an increase in inflation rates, which soared from 0.7% in 1967 to 5.11% in 1973. In an attempt to combat the inflationary pressures, the government enacted mandatory pricing policies for essential commodities, managing prices across crucial economic sectors, including agriculture, manufacturing, and housing, until 1973. However, after the war’s conclusion, it began to relax these controls, leading to inflation rates rising to 10.02% in 1974 and 9.67% in 1975, as depicted in figure 2.
Figure 2: Evolution of inflation rate in Egypt, 1966-1975
Source: World Bank, Inflation, consumer prices (annual %)
5. Adopting the Import Substitution Strategy: Between 1967 and 1973, the Egyptian government implemented a series of urgent measures to safeguard its foreign currency reserves. This included reevaluating import and export strategies to address the growing trade deficit, placing a stronger emphasis on local products, and adopting the ‘import substitution policy.’ This policy aimed to build a self-sufficient industrial base, cater to domestic market needs during wartime and economic downturns, reduce the trade deficit, cut down on imports by substituting local products for imported industrial goods, and create new employment opportunities. Furthermore, the government imposed a ban on the importation of luxury items in early 1972, including premium clothing, fabrics, radios, home appliances, and luxury carpets. Customs duties on luxury imports for personal use were raised by 50%, and the public sector took control of wholesale trade for essential goods, ensuring fair pricing and preventing price manipulation.
6. Rising Government Consumption: Between the 1967 and 1973 wars, the state significantly expanded its role in economic activity, resulting in a sharp increase in government consumption. It surged from EGP 488 million in 1967 to approximately EGP 1.077 billion in 1973, marking a growth rate of 120.7%, or 20.1% annually. This growth outpaced the average government consumption growth of 18.7% from 1960 to 1966, despite the rise in public sector projects and infrastructure development during that period. In contrast, private consumption growth between the two wars was significantly lower, averaging 7.6% annually, a decrease from the 10.4% average growth during the 1960-1966 period. This slowdown was primarily due to increased tax burdens, rising inflation, and a decline in the purchasing power of the Egyptian pound, all of which negatively impacted the purchasing power of citizens and altered consumption patterns.
7. Arab Aid: In the years following the 1967 war, Arab countries became Egypt’s primary source of aid. Cairo successfully secured grants and support from countries like Saudi Arabia, Kuwait, and Libya, which amounted to an average of approximately $286 million annually. This aid was crucial in compensating for the loss of foreign and Western aid, particularly after the complete cessation of US aid in February 1967. It also helped mitigate the economic challenges caused by the closure of the Suez Canal, the decline in tourism revenues, the destruction of infrastructure and factories, and the rising costs of accommodating displaced people from the Canal Zone. Moreover, it was essential for covering the increased military expenditures and servicing Egypt’s growing debt obligations in the aftermath of the war.
With increased defense expenditures, higher tax revenues, and a strategic emphasis on bolstering the local industrial sector, the Egyptian economy managed to shift from a phase of economic contraction to one of growth. By 1973, the GDP growth rate had improved to 3.5%, a significant turnaround from the 1.6% contraction observed in the aftermath of the 1967 defeat.
In short, economic resources play a crucial role during times of war and conflict. The efficient utilization of these resources prevents the economies of warring countries from sliding into recession or stagnation, while also enabling countries to prepare for battle with an economically viable strategy. This was evident in the Egyptian economy during the October 1973 War, where the strategic management of available resources and the flexibility to adjust government spending were key factors that contributed to Egypt’s 1973 victory, despite the heavy economic losses incurred after the 1967 defeat, such as the loss of oil revenue, Suez Canal earnings, and tourism income.
